China Can Be a Gold Mine for Hollywood, But…

Guest blog: There is one massive obstacle to a financial bonanza — somewhat surprisingly, it is the sheer size of that market of 1.2 billion consumers

Since 2012 ended with the Chinese box office as the premiere international territory, the marriage of Hollywood and China looks, on the face of it, like a surefire bet for Hollywood. Most industries dabbling in China face a tortuous courtship, made bearable only by the bride’s alluring dowry, a market of 1.2 billion.

Unlike most industries, Hollywood has several immediate advantages in fostering an American-style film culture in China. The summers are largely warm-to-hot and humid, suiting the tendency to retreat to air-conditioned public spaces. Residences are so cramped that public spaces, despite the crowds, are popular. The relative silence and sedateness of the cinema auditorium is a reliable and inexpensive oasis in China’s throbbing cities.

The cultural and political sensitivities are not always as clear as they might be, but at least in China the U.S. lags behind the Japanese in the instant antagonism derby. Japan and China are embroiled in what to the rest of the world is a relatively minor territorial dispute but one which that has had an astounding economic impact.

If large employers like Toyota and Nissan can be hammered, Hollywood must understand her distribution channels and DVD sales can be suspended on a whim with barely a ripple.

The demographics could be slightly confusing. The one-child policy will probably skew the numbers of the family film cash cow, but that sole child is likely to be spoiled so various game and toy tie-ins may be even more successful on a per head basis. A single industry being able to colonize a market nearly four times the size of its domestic arena is the stuff that, well, Hollywood dreams are made of.

However, before concluding that it all looks salivatingly rosy for Hollywood in China, there is one massive obstacle to this financial bonanza — somewhat surprisingly it is the sheer size of that market of those 1.2 billion consumers.

It’s not as paradoxical as it sounds.

To begin to understand Hollywood’s prospects in China we have to understand, as far as is possible, the Chinese economy. China’s success as the world’s factory has landed the Chinese economy in a bind.

There are several factors to this. Firstly, there is a strategic failure at the heart of Chinese industriousness — Chinese goods are not the output of the Chinese intellect. Unlike the examples of Germany and Japan, the two principal export economies of the post-WW2 era, German and Japanese exports were and still are German and Japanese products. "Chinese" exports are first and foremost Western corporate imports. Apart from, say, Lenovo, Haier and Huawei, Chinese brands are absent.

The trade imbalances that the Western politicians gripe about are the very same imbalances they were happy to see as the foundation of the "new paradigm" when their credit-drunk voters were filling their homes to the rafters with Chinese goods, fuelling the narcotic of false prosperity.

It is arguable, but the West is more to blame for the current situation than the Chinese. The more the Chinese manipulate their currency, if they do, the cheaper Western corporations can sell their products to bargain-hungry Western consumers.

For China to succeed, she must create new brands and products that global consumers are willing to accept as leaders in their sector. The Japanese took this route, and the Korean are succeeding and surpassing them on this path. However, for China it has enormous pitfalls. Firstly it would involve unleashing, rather than constraining, Chinese talent.

Much more significantly, Germany and Japan succeeded as export economies due to their comparatively small population bases feeding larger consumer markets. China to continue to succeed as an export economy is dependent on an external market that must, obviously, be richer and much larger.

For China to be a gold mine for Hollywood she has to migrate her exports to high value production but that strategy needs a larger and richer market that has enough disposable income to pull China to the first rank of nations. But the opposite is happening. China’s principal markets, the U.S. and Europe, are getting poorer more quickly than the political class dare admit.

China can import western jobs but only on the basis that the Chinese worker is paid less than his western counterpart. So both China and the Western economies are stuck in a mutual trap of their own making. China needs to export more and better items to get rich while we need them to export less for our own economies to produce more high salary jobs which produce high value exports for the Chinese too buy, which they can’t do unless they get rich sending us even more exports!

This will end in a tearjerker where everyone could be left sobbing. It is likely that China will boost Hollywood much like DVD, a boom then bust in a short cycle.

The political implications for Hollywood in China are just as uncertain. The murder of a British businessman by the wife of a leading politician, one a whisker away from power, has exposed the corruption and fragility of the system to the Chinese masses as much as the rest of the world. A messy unraveling of the system will make the Arab revolutions look like Disneyland. Almost everyone agrees that the era of unquestioned leadership is over.

For every Chinese co-production, the urgent question should not be, "Will it be a hit?" but rather, "How did these guys acquire their money?" In most cases it will be skimmed from the public purse. In fact, Hollywood’s profile and the nature of film glamour, regardless of how thankless so much of the work is, makes the industry’s position even more hazardous than any other sector.

Hollywood would be wise to choose its Chinese partners very carefully. Well-connected individuals with lots of spare cash have not reached that position in China through honest toil. Hollywood could find itself identified as the Chinese elite’s money launderer of choice.

The political risks for Hollywood are arguably greater than the rewards will ever merit. No matter what the Republicans may say, throughout the world Hollywood is an ambassador of soft American power, and a very effective one too. Indeed if anything the risks are doubly perilous.

The film industry could find itself as easy target for Chinese political wrath without much pain on the Chinese end of operations and U.S. political attacks could be effective on an industry already perceived a spoiled and out of touch with the American mainstream.

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